No matter how miserable 2022 was for investors of all sorts, they could have undone all manners of sin with one simple move — going long Chinese stocks in late October.
The KraneShares CSI China Internet ETF has exactly doubled (okay, rose 99.88%) from its Oct. 24 intraday low. Of course, no one in their right mind would’ve made that investment allocation, so here in the real world, the question really is how far the rally can go.
Mark Haefele, chief investment officer at UBS Global Wealth Management, says China’s unexpectedly rapid dismantling of COVID restrictions is paving the way for a faster-than-anticipated economic reopening. UBS has upgraded Chinese equities to “most preferred” in Asia, at the expense of South Korea, and says select companies in the consumer, internet, pharmaceutical, medical equipment, transportation, capital goods and materials sectors are likely to see more front-loaded returns.
Onto the call of the day from Morgan Stanley, which in the same vein says it’s turned “even more bullish” on China. A team led by Laura Wang kept an overweight rating and raised their year-end target on the MSCI China index from 70 to 80. (The iShares MSCI China ETF ended Monday at $52.43.) It also lifted its China GDP growth estimate by three tenths, to 5.7%, which is ahead of the consensus 4.8%.
The market, the Morgan Stanley team say, is still underappreciating the far-reaching ramifications of reopening, and the possibility that a decent cyclical recovery can occur.
While there’s a visible rebound in mobility and offline entertainment, underappreciated improvements include more effective business communications and supply chain coordination, reduced uncertainty in investment and smoother implementation of public capital spending plans.
The Morgan Stanley team also expect countercyclical easing to remain in place in the first half, and even the beleaguered housing sector to see sales turn positive in the early second quarter.
Buy large-cap, highly liquid Chinese internet companies with a preference for Alibaba the Morgan Stanley team say. “Despite the recent rally, we believe global investors have yet to build enough exposure to Chinese equities, particularly for the global long-only funds,” they said.
They also advised continuing to buy reopening beneficiaries, which the analysts say they’ve been recommending since the middle of November. Most of these reopening names are Hong Kong-listed, though Trip.com Yum China and Melco Resorts & Entertainment also make the list.
One other notable point — even with the recent rally, it would take a further 80% outperformance for the Chinese market relative to the S&P 500 to get back to the relative performance of early 2021. While that’s not the base case, similar surges in China performance have been front-end loaded in the past, particularly with accommodative monetary and fiscal policy and declining political risks.
“In the latter regard, we would note internally on this occasion of the Party Congress, measures to support the property sector and a more relaxed approach to private sector regulation,” they say. “Externally we would highlight the appointment of China’s former ambassador to the U.S. as foreign minister and a more conciliatory tone in general from the China side in relation to trade and non-trade disputes with foreign powers.”
U.S. stock futures were weaker after the disappointing finish to Monday’s trade. The yield on the 10-year Treasury was 3.55%.
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